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Making Cents in Penny Stocks

A low price doesn't always mean low quality.

The occasional shower of pennies from heaven might do our bank accounts some good. Alas, Fools can't say the same for penny stocks. They're often subject to manipulation and deceit, making it harder for investors to separate the few good offerings from the multitude best ignored.

Still, many investors enjoy dabbling at the low end of the stock-price spectrum. At Motley Fool CAPS, a "penny stock" is any stock trading under $10, and you'll find some of the best CAPS All-Stars regularly seeking out winning investments there. We identify them with a penny icon.

Pinching penniesThis week, we'll look at three low-priced investments the CAPS community has singled out as those with the best chances of success by bestowing four- and five-star ratings on them. We just might want to turn our umbrellas upside-down to catch them!

The above three companies may be low-priced, but that isn't necessarily enough to suggest they'll have an easier time recording big gains. Low-priced stocks are often low-priced for a reason. We have to check and see what their catalysts for growth might be before diving into the shallow end of the stock pool.

Drilling through debtReporting assets of $376 million offset by $311 million in debt but with mounting losses, Delta Petroleum was unable to find a buyer for its operations and just filed a Chapter 11 bankruptcy last week. That brings into focus just how precarious the situation is facing ATP Oil & Gas, which has $2 billion worth of debt and a debt-to-equity ratio north of 600%. Plains Exploration & Production(NYSE: PXP) with a D-E ratio of just above 100% looks downright stable in comparison.

Having such large bills to pay, even with production increasing or expected to, makes for a very uncertain future if demand for oil collapses. Europe's financial situation could readily cause that scenario to unfold, making it difficult for overextended exploration companies like ATP and Plains to maneuver. Yet Noble Energyrecovered from the Gulf disaster, leading some smart Fools to think ATP could do likewise.

A survivorAlso finding itself in a precarious condition is biotech Exelixis, which failed to reach an agreement with the FDA on how a study of its experimental prostate cancer drug cabozantinib should be conducted. However, it still has a bright future since the regulatory agency didn't reject its treatment, but only said it would have to go through the regular approval process.

Exelixis will first study cabozantinib's ability to reduce pain with no impact on survival, then move on to survivability itself. Certainly, with no drugs on the market, the extended timeline makes the course more difficult, but seemingly not the zero-growth future the market seems to imply by the price it has assigned the biotech. The fear, though, is that it's going to have to do some significant fundraising in the meantime, and should the drug ever make it that far, cabozantinib will compete against AstraZeneca's (NYSE: AZN) vandetanib in the thyroid cancer market, and against Johnson & Johnson, Dendreon, and Sanofi in the potentially more promising prostate cancer market.

CAPS member ralphie4000 believes the history of cabozantinib will lead to a positive result: "Not to worried about the recent drop (other than that my stake suffered), positive test results leading into the next phase of testing."

Put Exelixis on your watchlist and let us know in the comments section below whether you think it will surprise Wall Street next quarter.

Running redThe saying "Buy when there's blood in the streets" has an even more meaningful corollary: "even if it's your own." That means displaying the confidence necessary to buy stocks you already own even if the market has thus far proved you wrong. The copper markets would certainly be apropos here, but Taseko Mines would epitomize the bloody streets you should be buying into today.

The copper and molybdenum miner has performed terribly, with shares down 41% over the past six months as the markets sold off the metal. In comparison, Freeport-McMoRan(NYSE: FCX) and Teck Resources(NYSE: TCK) have only lost around half that much, and most other miners haven't lost as much as Taseko.

But with multiple paths leading to a profitable outlook amid sustained high prices for the other yellow metal, Taseko looks like a bargain at these levels. CAPS member pantha104 sees its recent difficulties behind it and is looking for its rich assets to pay off.

The stock went down because of environmental issues and a no vote from Canadian government, which is solved now. It continues to buy and improve there mining equipment. They own great properties that when completely developed, will bring in great profits.

Make some changeFrom tiny valuations big profits can emerge, and the Motley Fool has found the one company pushing a breakthrough technology that can change the face of business. It might not be a penny stock, but it can still put a fistful of dollars in your pocket. I invite you to take a free copy and find out the name of the company the Fool believes is already a leader, with headliner clients like PayPal and 3M.

Author

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time. Having made the streets safe for Truth, Justice, and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio.
His coverage reflects his passion for motorcycles, booze, and guns (though typically not all exercised at the same time), but his writing also covers the broader sectors of consumer goods, technology, and industrials. So follow along as he tries to break down complex topics to make them more understandable and useful to the average investor.